Glencore is in talks with Spanish refiner Cepsa on a tie-up of oil operations that would be a first major step towards transforming the commodity trader's energy division into a vertically integrated oil company, industry sources said.

A dozen trading, industry and banking sources said Glencore's deal with Cepsa, which has three refineries in Spain and production assets in Algeria, was being discussed although they gave conflicting accounts of the details.

Several sources said Glencore, the world's largest diversified commodities trader, may acquire a large chunk in Cepsa, which is owned by Abu Dhabi's investment vehicle IPIC. The latter is also a major shareholder in Glencore following the trader's initial public offering earlier this year.

It is all about Glencore's ambitions of becoming a major vertically integrated company, one trader said. Glencore, Cepsa and IPIC all declined to comment.

Sources said a full-fledged merger is not on the cards.

A senior Western banker said he thought the deal would probably result in Glencore taking a stake in Cepsa, IPIC possibly receiving a stake in Glencore and Glencore becoming the main crude supplier of Cepsa.

The deal would be good for Cepsa, as it would get access to Glencore's marketing and provide liquid shares for its parent (IPIC), he said, adding that IPIC might also be the driving force behind the deal.

LOOKING FOR SYNERGIES

Glencore floated shares at 530 pence on May 24 and on Wednesday they were trading at 382 pence, almost 30 percent down on the IPO price and underperforming the broader market since May, which would mean hundreds of millions of dollars of paper losses for IPIC.

IPIC was the largest cornestone investor in Glencore's IPO via its division Aabar. A lock-up clause preventing cornerstone investors from selling expired last week.

IPIC is unhappy with the Glencore share performance since the IPO. So one way to improve this is to find synergies through a combination of Glencore's oil division and IPIC's energy assets in Europe, including Cepsa, one industry source said.

IPIC, or International Petroleum Investment Company, paid 3.7 billion euros to buy out Total's 49 percent in Cepsa earlier this year, which would value the whole of Cepsa at over 7 billion euros (6 billion pounds).

Some trading sources said the tie-up might be limited to Glencore's London-based oil trading office absorbing Cepsa's trading division and agreeing to supply it with oil.

Strategically it makes a lot of sense for Cepsa, whose cost of capital and financing is much higher than Glencore's, if you take into account Spanish sovereign debt risks, one industry source said.

Cepsa has exploration and production assets in Algeria and buys annually around 22 million tonnes of crude (159 million barrels) mainly from the Arabian Gulf and West Africa to supply its three refineries in Tenerife in the Canary islands, La Rabida in southern Spain and San Roque in the Gibraltar.

(Reporting by Emma Farge, Jessica Donati, Ikuko Kurahone, Martin Roberts, Clara Ferreira-Marques, Victoria Howley, Stanley Carvalho, Christopher Johnson, Zaida Espana; Editing by Anthony Barker)